Market Capitalisation Essay Example

value of outstanding shares. This calculation, commonly known as market cap, is separate from equity value. The distinction arises when a company has outstanding stock options or other securities that can be converted into common shares.

Market capitalization is an important indicator of a public company's performance, taking into account its growth and size. This measurement can be influenced by acquisitions, divestitures, and stock repurchases. To calculate market capitalization, one must multiply the current share price by the number of common shares. Additionally, it represents the total funds used to support a company's balance sheet and is calculated as market capitalization plus debt and preferred stock.

The stock price of a company determines its market capitalization, which may not always accurately represent the actual value of the firm. This discrepancy can occur due to varying investor expectations for the future. As a result, the market capitalization often surpasses the "book value" of the company, leading to higher market prices compared to earnings. The reason behind this is that anticipated future growth contributes to adding value. It should be noted that the total number of shares available for trading on the open market might be lower than the overall number of shares due to insiders and the company itself holding onto some portion of "free float" shares.

Furthermore, the float of a stock can be significantly lower than its total number of shares because large institutional investors, who do not trade frequently, own a portion. Consequently, only a small percentage of shares are usually exchanged daily. The valuation of securities can be achieved through discounted cash flow (DCF) analysis, which involves forecasting various factors. In this study, I employ

simulation to assess how different variables affect the projected stock price. The primary objective of discounted cash flow modeling is to establish meaningful benchmarks that can justify a company's long-term operational performance.

The market benchmark is typically earnings or earnings growth. Additionally, various assumptions about the primary forecast time horizon and the choice of a 20-time horizon are explored. Security analysts use different methods to determine stock recommendations, with discounted free cash flow (DCF) analysis being considered the best method. However, this analysis requires the analyst to forecast numerous variables.

Due to the model's complexity, many people choose simplified P/E models and forecasts for earnings growth. This paper demonstrates an example of using simulation to identify the most significant variables 21.